Rebooting manufacturing in mainland China

Manufacturing companies in China are beginning to implement staged returns to onsite work for their factory employees as the spread of the coronavirus (Covid-19) levels off. Local governments, under state guidance, are instructed to support this return to normalcy by slowly removing the temporary restrictions put in place to limit the spread of Covid-19. This includes conducting site inspections and providing permits to companies to allow employers to reopen their doors. As workers return to their place of work, the responsibility for continuing to combat the virus will be increasingly shared with employers. These positive changes are the first steps towards a return to economic growth.

For manufacturing companies, many of these initial steps have already begun. Some manufacturers have been soft starting for a week or more, and a full 75 per cent of plants are expected to open by the end of February, with the remainder to open in early March. However, according to a survey by the American Chamber of Commerce in Shanghai, 78 per cent of factories do not have enough workers to resume full production.¹ The return to productivity will raise several issues for Chinese management to address, namely: the return of employees to the factory and their ongoing wellbeing, rebuilding the supply chain, prioritising downstream demand, and logistical challenges.

For management and office staff, many have been back to work since 10 February and managing the crisis from home. Many are hosting or joining online meetings and webinars, some with their competitors to better understand the daily changes and challenges the virus presents. However, for factory and service workers, returning to work may not be a simple task and as of mid-February fewer than one third of China’s 291 million migrant workers have returned to their jobs.² This ratio is changing rapidly as companies and local governments arrange special transportation to incentivise and accelerate the return to work.

As factory workers return to their city of employment, they may find themselves in quarantine for up to two weeks. For those who returned immediately after the Lunar New Year, this period will have already elapsed, and they will be permitted to return to work. For those who returned later, or who are still unable to return, their absence will reduce capacity. The impact of this is felt unevenly throughout the country. Guangdong, with a large percentage of migrant workers, is expected to face significant manufacturing capacity challenges for these reasons. However, employers are expected to honour employment contracts and provide regular salaries throughout the crisis period, and part-time or no-pay leave policies continue to be discouraged. Post-quarantine, additional attention will be paid by inspectors and employees to health and safety issues and passing an inspection is a pre-requisite for reopening a factory. This may require changes to the factory floor operations, regular meeting arrangements, and access to the factory.  Some manufacturers have allocated a percentage of their manufacturing capacity to the production of face masks for employees to encourage their safe return.

For some manufacturers, their existing final product supply may suffice to meet downstream demand in the near-term. Manufacturers typically ramp up production in the months leading to the Lunar New Year to compensate for the decrease in productivity during the holiday. In addition, manufacturing often takes time to return to pre-holiday levels as factory workers extend their Lunar New Year holiday for an additional week or two. As a result, some manufacturers may find that their finished products in the channel will continue to meet demand as the restart process continues. However, factories in Hubei are expected to remain shuttered for some time, as the top priority remains the controlling of the disease and the physical wellbeing of the population.

Companies with a long supply chain or who provide products mostly to the export market will need to prioritise which customer orders they fulfil first. As domestic demand is expected to be soft during the recovery, companies may see reduced demand from Chinese customers, allowing for natural prioritisation of international customers. Manufacturers that are part of a global supply chain such as chipset makers and auto part suppliers may find themselves pulled in different directions by their global customers.  Companies are reporting business continuity concerns from even captive global customers and are faced with the challenge of providing frequent updates on the local situation to assuage customers’ various concerns and convince them to continue to place orders in the future.

Between points on the supply chain, logistical services providers are facing similar challenges, which are further exacerbated by local and international restrictions on the movement of goods and people.  Many provincial borders remain closed or difficult to cross, and even intracity travel remains temporarily limited or discouraged. Trucks and drivers are temporarily required to have additional documentation to cross borders within China which were not previously required, or at least less scrutinised, however the removal of these requirements has already begun. Additionally, Wuhan is one of the largest logistical hubs in China, and although most manufacturing in Hubei is for domestic use, it is important as a major transit point for products from across western China. For international shipping, most container terminals remain open, however they are facing the same challenges in staffing, and are seeing significant reduction in vessel volume and utilisation, with some vessels only 10 per cent loaded when departing.³ For air cargo, passenger air traffic is 20 per cent of what it was on 18 February 2019 and with large percentages of air cargo being shipped in passenger jets, manufacturers may find their goods delayed regardless of the method of shipment. Management will need to consider these risks in their supply chain as business resumes.

Despite these challenges to business continuity over the past few weeks, the economic engines of the country are beginning to turn again. For the past several days, the number of new cases of Covid-19 has declined day on day. New daily confirmed cases outside of Hubei have dropped for two weeks. Over the same period, several provinces have had either no new cases or new cases in the low single or double digits. These positive signs are being broadcast to every smartphone in the country, with many citizens waking to check their virus notification app before checking for messages from similarly homebound friends and co-workers. All of us are eagerly preparing for China’s inevitable return to economic dynamism.